The Basics of Auto-IRAs – State-Run Retirement Programs for Smaller Employers

If you work for a small business that doesn’t offer a traditional retirement plan, an auto-IRA may be an available alternative.

Research says that 28 million American workers don’t have access to a typical 401(k) plan through their job, but many still want to put money into a retirement account.

Enter the auto-IRA: a state-run program that private-sector employers who don’t sponsor their own retirement plans adopt so that their employees can save for retirement.

Where is the auto-IRA available and how does it work?

Oregon was the first state to offer auto-IRAs, and now, six other states have the same program (California, Maryland, Connecticut, Illinois, Colorado and New Jersey). Nearly two dozen other states are considering similar legislation, including Pennsylvania, Wisconsin, Vermont and Virginia.

Here’s how it works: depending on the state, employers that meet certain qualifications either may choose to, or be required to, adopt its state auto-IRA (also called Secure Choice accounts).

Employees are automatically enrolled in the program—although they may choose to opt out—and a preset percentage or dollar amount of their wages are withheld and deposited into the account, typically between 3% and 5% of gross pay. Some Secure Choice accounts even have an automatic annual contribution rate step-up. For example, California’s Secure Choice increases workers’ contribution rates by 1% each year, capped at 8%.

And, just like any other retirement plan, Secure Choice accounts have contribution limits, a menu of investment options, and rules that govern withdrawals. Because the Secure Choice account relies on negative consent (workers must opt out, rather than opt in), it takes advantage of employee inertia to help workers save for retirement―another thing that the auto-IRA has in common with its employer-sponsored counterparts.

Are there any downsides to the auto-IRA?

So far, the Secure Choice account probably sounds like a wonderful idea for workers who aren’t able to participate in a traditional 401(k) plan through their employers. However, such plans can be more expensive than maintaining an IRA on your own. There may also be a lack of personalized financial advice with auto-IRAs, especially for folks who don’t have the time or inclination to research potential investment options.

If you have a Secure Choice account through your employer–but you’re not sure if it’s the best option for you–why not talk to one of our financial advisors and get a free second opinion? Click here to set up a no-obligation meeting with one of them.